April 29 (Bloomberg) -- As Nokia Oyj struggles to catch
Apple Inc. and Samsung Electronics Co. in the market for
smartphones costing $500 or more, it’s counting on a bare-bones
handset that sells for just $20 to give it an edge.

Priced 97 percent below the latest iPhone, the Nokia 105
features preloaded games, a color screen, a radio, a speaking
clock and a flashlight. The phone, Nokia’s cheapest ever, has
been available for a few weeks in India and Indonesia and will
soon start selling in Europe.

Even with its bargain-basement price, the 105 is critical
to Nokia’s entire handset business. Nokia reported April 18 that
it sold about 11 million fewer mobile phones in the first
quarter than analysts had projected, with sales of basic phones
plunging 21 percent to 55.8 million units. A failure to revive
the low-end business would leave Nokia without an important
source of cash as it seeks to develop devices to challenge the
iPhone and Samsung handsets running Google Inc.’s Android.

Falling sales of simpler phones are “definitely
worrisome,” said Mika Heikkinen, a fund manager at FIM Asset
Management in Helsinki, who helps oversee some $2.5 billion,
including Nokia shares. “They have to get this under control.”

Nokia Chief Executive Officer Stephen Elop, speaking to
investors after the report, pointed to the 105 as a signal that
the low-end business can recover after a “difficult” quarter.

Recovery Signal

While demand for the iPhone and Android devices have made
smartphones the fastest-growing part of the market, basic
handsets still make up more than half of units sold. That means
hundreds of millions of phones each quarter -- a market Nokia
dominated until Asian manufacturers such as ZTE Corp., Huawei
Technologies Co. and Samsung started challenging it more
aggressively. Nokia says the 105 will be profitable, but
declined to provide any details. Liberum estimates Nokia will
enjoy a margin of about 20 percent on the device.

Of the 336 million handsets Nokia sold last year, only
about 10 percent were smartphones. Basic models accounted for 31
percent of Nokia’s revenue, versus 18 percent for smartphones
Network equipment made up most of the balance.

Nokia had more than half of the mobile handset market
before Apple introduced the iPhone in 2007. Nokia shares have
fallen more than 80 percent since then, while Samsung has risen
154 percent and Apple has quadrupled. After five consecutive
annual losses, Nokia is down 14 percent this year through April
26.

The stock rose 1 percent to close at 2.53 euros in
Helsinki, valuing the company at 9.5 billion euros.

Developing Markets

Nokia, based in the Helsinki suburb of Espoo, is counting
on cheaper phones like the 105 to build trust in the company’s
brand in growth markets such as India and China. Customers who
buy a 105 will stick with Nokia when moving to more expensive
devices in the years ahead, the company reasons.

“The low-end, high-volume part of the mobile-phone market
is a huge opportunity for Nokia in developing countries,” said
Francisco Jeronimo, an analyst at IDC in London. “These users
will be likely to upgrade to more expensive phones over time, so
it’s a good strategy to keep a high market share in this
segment.”

The 105 is “very competitive” and should help Nokia with
its low-end recovery effort, said Neil Mawston, an analyst at
researcher Strategy Analytics in London. A predecessor to the
105, called the 1280, sold more than 100 million units over
three years.

Simpler phones have “been the bedrock of Nokia’s business
for the past decade,” Mawston said.

35 Days

Nokia’s expertise in handset production makes it possible
to turn a profit on a $20 phone, Jeronimo said. For years the
world’s largest mobile-phone maker and now No. 2, Nokia makes
more than 600,000 phones a day in seven factories around the
world, using parts from suppliers it knows well. Chinese rivals
may be able to make a device as cheap as the 105, but they lack
the features and services from Nokia, Jeronimo said.

The candybar-shaped 105 is 25 percent cheaper than the
Nokia 1280, yet its battery lasts 56 percent longer -- 35 days.
The phone is resistant to water and dust and comes with text-message-based tools that teach English and provide basic health-care advice.

Despite such features, the company sought to simplify the
phone’s software, which in turn allowed it to use cheaper parts,
said Dirk Didascalou, head of R&D for Nokia’s mobile-phone
business.

Lumia Attention

“To be successful at the low end, one needs to explicitly
do innovative work with a focus on delivering value,” he said
by phone from Nokia’s research facility in Beijing. “If you
don’t, you get in a cost spiral where you’re always a bit too
expensive compared to somebody else.”

Even as the slump in simple handsets has stolen investor
attention, Nokia’s main goal is to make a full recovery in
smartphones, where profit margins are widest. Apple’s 32-gigabyte iPhone 5 sells for $750, while Samsung’s Galaxy S4 goes
for $640 and Nokia’s flagship Lumia 920 is $450.

Nokia sold 5.6 million Lumia phones, which run on Microsoft
Corp.’s Windows, in the first quarter, up from 4.4 million in
the previous three months. But the iPhone and Android control
more than 90 percent of the smartphone market, while Nokia has
just 3 percent, according to Strategy Analytics. So it’s far
from clear Nokia can break that dominance even if its low-end
devices recover, said Mikko Ervasti, an analyst at Evli Bank in
Helsinki.

“Nokia may still be the second-biggest phone maker in the
world,” Ervasti said. “But if it’s going to have a chance at
long-term success it needs to make sure it also has the right
smartphones.”